Buyers Meeting Point procurement by Kelly Barner

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"The Point" is written by BMP Editor Kelly Barner as well as a diverse group of guest contributors.

Nearshoring: Why now?

Nearshoring: Why now?

When you think of outsourcing manufacturing operations, what country do you typically think of? China? Vietnam? Philippines? Yes, Asia is typically the go-to region for companies looking to cut costs by outsourcing production processes - and for good reason. Asia possesses both the labor and raw material resources to make the region an effective substitute to higher cost labor in the U.S. and the limited availability of certain raw materials in North America.

While outsourcing to low-cost countries such as China has its benefits (i.e. labor/overhead costs, raw material costs, scalability, freeing up the business’ time to focus on other critical functions, etc.) it comes with challenges as well. Lead times, language barriers, time zone differences, IP integrity, and a general lack of physical presence make outsourcing certain functions a constant struggle for US-based manufacturers and can outweigh the initial savings gained over the long-term. Companies oftentimes look at the price-tag of outsourcing functions such as IT support or manufacturing assembly work, figuring the decision is obvious. However, to minimize risk and to optimize/streamline domestic manufacturing operations it is important to weigh the pros and cons of outsourcing, especially in deciding which low-cost region to outsource to, which processes to outsource, and which partner(s) to use.

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Are Suppliers Faceless Entities?

Are Suppliers Faceless Entities?

The term supplier is banded around with such ease, yet has it devalued the relationship and removed the individual, resulting in generic and stale business relationships?

The supplier

The associated business activity of a supplier is simple enough: the supplier delivers goods/services to the buyer in order to fulfil a contractual requirement. However, the challenge is that the term can also be used in many other ways. For example:

  • It can be used as an excuse to blame poorly structured contracts. “The supplier didn’t agree”

  • It can be used to justify the buyer not doing something they don’t want to do “the supplier didn’t support it”

In essence the word “supplier” is used as a generic label to cover all and any activity between the buyer and their supply chain.

Labels

Society has a habit of labelling many areas of the world we live in, ranging from how one’s spouse might be identified “The wife/husband” through to labelling social, economic, political, regional, and religious groups.

When a label is used it can de-humanise the individual. Sometimes this is a deliberate approach to make it easier to talk about a wider group, however when used incorrectly it can also have a detrimental effect on how the individual identifies their value and how others evaluate their contribution.

Human relationships are behind all commercial contracts, and so de-humanising the relationship may feel like a convenient model for addressing multiple aspects but one needs to question if it will really drive the best out of the relationship.

Who Cares?

When we look at the relationship between the buying organisation and their supply chain, we see a trend. Suppliers who are valued are rarely labelled as “the supplier” but are identified by either the company name or account team members. When this supplier is discussed internally, the ability to name the company/account team demonstrates to the business the value placed upon the relationship.  This has a knock on effect within both organisations, a greater focus placed on the human relationships creates a stronger desire to accommodate and collaborate.

With more and more automation being introduced into the procurement processes, it has the capability to remove the human relationship aspect of doing business. Now more than ever one needs to focus on how labels are applied within business.

Collaboration

Collaboration remains an undeveloped area of business opportunity, with few organisations able to say they collaborate with their entire supply base. Collaboration can take many forms but they all require a human desire to want to engage. The level of support buying organisations can generate from their supply chain may be directly influenced by how the supply chain has been labelled.

The future

The next time you discuss “the supplier” you may want to reflect if it is being used to truly reflect the larger community or to cover up other underlying issues. It is human nature to blame a faceless entity when convenient such as “The Business believes XXXX,” however to get the most out of others you need to respect who they are and what they bring to the relationship.

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Spend Analysis 101

Spend Analysis 101

As a procurement professional, I am frequently tasked with conducting a spend analysis on behalf of current and potential clients, but for those outside of the industry, this may be an unfamiliar exercise. In this post, I will attempt to provide a crash course on spend analysis, answering some of the most commonly asked questions about the topic: What is a spend analysis? Why should I do one? And finally, how do I do it?

A spend analysis is a very broad term that refers to… you guessed it! Analyzing the spend of an organization with the objective of understanding where money is being spent and where there may be opportunity for cost savings or process efficiencies. Spend analyses are conducted by procurement professionals in an attempt to get a comprehensive view of all of an organization’s expenditures and they are frequently the starting point for beginning the strategic sourcing process. There are a number of benefits to conducting a spend analysis, but the most important is transparency. A spend analysis provides a holistic view of all spend (indirect and/or direct) in a given time period, typically during a fiscal or calendar year. By doing this, you are able to gain visibility into where spend is being allocated, who the top suppliers are, how many suppliers you use for certain services, and areas of opportunity. For decentralized organizations, a spend analysis may reveal potential service redundancies across departments/brands and provide insights into areas of consolidation across supply bases. Along the same lines, a spend analysis provides organizations with the information needed to increase spend control by showing where and how spend/budgets are being allocated. Although there are many reasons why an organization would conduct a spend analysis, the benefits are consistent.

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Should procurement be paid commission?

Should procurement be paid commission?

It is not uncommon for procurement to receive a bonus payment based on the savings the department has achieved. In this post we discuss if procurement would benefit more from being on a salary plus commission payment structure.

AFTER READING, TAKE OUR TWITTER POLL: Should procurement be paid commission?

The traditional approach for calculating pre-contract savings is to obtain a minimum of three supplier quotes, select the mean as the base point then count the additional savings achieved above the base point. The challenge for the CFO is because the savings are subjective, they are unable to truly identify tangible and quantifiable savings from procurement’s impact, therefore the level of bonus they might apportion directly to procurement is limited.


 

Assessing bid submissions based not just on initial costs but total forecasted end to end costs is becoming more prevalent as businesses take a wider view of the true cost of ownership. However, since the model for encouraging procurement to strive for savings remains focused on the bid submission, applying this approach to determine bonus compensation has a high likelihood of conflict. The bonus payment approach could arguably be stated as outdated, thereby creating an opportunity for procurement. An alternative approach might be to replace the bonus model with a commission structure, based on the end to end total contract savings.

 

Procurement benefits would include:

  • Ability to be recognised for the full business value a team/individual delivers.
  • Encourages and rewards end to end contract ownership and relationship management.
  • Encourages post-contract collaboration, ultimately leading to the possibility of generating post-contract savings within the same contract term.

 

The potential benefits for the business include:

  1. Maximises pre and post-contract savings.  Post-contract savings is an area currently underdeveloped as the main focus remains on pre-contract savings, which is understandable given it is the main area for bonus achievement.
  2. Creates a catalyst for procurement cultural change, focused on supplier collaboration and successful implementation. This unlocks the supply chain and drives innovation and collaboration across the business to increase bottom line profits.
  3. Ensures operational costs are kept to a minimum.
  4. Encourages and rewards end to end contract, maximising contract savings

 

There are many people within procurement who have “fallen” into the role rather than pro-actively sought to become procurement professionals. Even those who have deliberately sought after the role, few may still believe it was a good career choice. The change to commission based compensation has the potential to raise procurement salaries to new levels, provide a catalyst for change, and enable procurement to reflect their full business value, which could in turn could attract new talent and retain experience that is sorely needed.

Like all new ideas, there is an upside but also a downside. Moving onto a commission structure based on the overall savings from successfully managing the contract could quickly lead to some personnel being identified as under delivering. The key to gaining business support in this initiative is by demonstrating greater profitability for the CFO in undertaking this route. The central question is: does procurement want to undertake this direction?

 

 

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Would You Buy From You?

Would You Buy From You?

If you were to review your own procurement team’s achievements and capabilities from the perspective of a customer, would you buy from you?

The principle of using an internal business function which is currently a cost centre, and turning it into an revenue generating business proposition, is not new. Examples can be found in most areas ranging from IT through to Finance. The principle is based on creating such a leading business function others will pay to use.

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